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Thursday, June 08, 2017

Trust and the poverty trap.

More than 1.5 billion people worldwide live in poverty. Even in the United States, 14% live below the poverty line. Despite many policies and programs, poverty remains a domestic and global challenge; the number of US households earning less than $2/d nearly doubled in the last 15 y. One reason why the poor remain poor is their tendency to make myopic decisions. With reduced temporal discounting, low-income individuals could invest more in forward-looking educational, financial, and social activities that could alleviate their impoverished situation. We show that increased community trust can decrease temporal discounting in low-income populations and test this mechanism in a 2-y field intervention in rural Bangladesh through a low-cost and scalable method that builds community trust.

Abstract

Why do the poor make shortsighted choices in decisions that involve delayed payoffs? Foregoing immediate rewards for larger, later rewards requires that decision makers (i) believe future payoffs will occur and (ii) are not forced to take the immediate reward out of financial need. Low-income individuals may be both less likely to believe future payoffs will occur and less able to forego immediate rewards due to higher financial need; they may thus appear to discount the future more heavily. We propose that trust in one’s community—which, unlike generalized trust, we find does not covary with levels of income—can partially offset the effects of low income on myopic decisions. Specifically, we hypothesize that low-income individuals with higher community trust make less myopic intertemporal decisions because they believe their community will buffer, or cushion, against their financial need. In archival data and laboratory studies, we find that higher levels of community trust among low-income individuals lead to less myopic decisions. We also test our predictions with a 2-y community trust intervention in rural Bangladesh involving 121 union councils (the smallest rural administrative and local government unit) and find that residents in treated union councils show higher levels of community trust and make less myopic intertemporal choices than residents in control union councils. We discuss the implications of these results for the design of domestic and global policy interventions to help the poor make decisions that could alleviate poverty.